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People in Economics

Class Analyst

Chris Wellisz profiles Branko Milanovic, a leading scholar of inequality

As a child growing up in Communist Yugoslavia, Branko Milanovic witnessed
the protests of 1968, when students occupied the campus of the University
of Belgrade and hoisted banners reading “Down with the Red bourgeoisie!”

Milanovic, who now teaches economics at the City University of New York,
recalls wondering whether his own family belonged to that maligned group.
His father was a government official, and unlike many Yugoslav kids at the
time, Milanovic had his very own bedroom—a sign of privilege in a nominally
classless society. Mostly he remembers a sense of excitement as he and his
friends loitered around the edge of the campus that summer, watching the
students sporting red Karl Marx badges.

“I think that the social and political aspects of the protests became
clearer to me later,” Milanovic says in an interview. Even so, “1968 was,
in many ways, a watershed year” in an intellectual journey that has seen
him emerge as a leading scholar of inequality. Decades before it became a
fashion in economics, inequality would be the subject of his doctoral
dissertation at the University of Belgrade.

Today, Milanovic is best known for a breakthrough study of global income
inequality from 1988 to 2008, roughly spanning the period from the fall of
the Berlin Wall—which spelled the beginning of the end of Communism in
Europe—to the global financial crisis.

Earnings stagnate

The 2013 article, cowritten with Christoph Lakner, delineated what became
known as the “elephant curve” because of its shape (see chart). It shows
that over the 20 years that Milanovic calls the period of “high
globalization,” huge increases in wealth were unevenly distributed across
the world. The middle classes in developing economies—mainly in
Asia—enjoyed a dramatic increase in incomes. So did the top 1 percent of
earners worldwide, or the “global plutocrats.” Meanwhile, the lower middle
classes in advanced economies saw their earnings stagnate.

The elephant curve’s power lies in its simplicity. It elegantly summarizes
the source of so much middle-class discontent in advanced economies, discontent that has turbocharged
the careers of populists from both extremes of the political spectrum and
spurred calls for trade barriers and limits on immigration.

“Branko had a deep influence on global inequality research, particularly
with his findings on the elephant curve, which has set the tone for future
research,” says Thomas Piketty, author of the bestselling Capital in the Twenty-First Century. Piketty and his collaborators
confirmed the findings in a 2018 study, which found that the top 1 percent
globally captured twice as much of total growth as the bottom 50 percent
from 1980 to 2016.

Milanovic’s findings “appear to be even more spectacular than what was
initially suggested,” Piketty says. “The elephant looks more like a
mammoth.”

Economists long disdained the study of inequality. Many lived in a
theoretical world populated by a mythical figure known as homo economicus, or rational man, whose only attribute was a drive
to maximize his well-being. Differences among people, or groups, were
irrelevant. Variety was irrelevant. Only averages mattered.

In this world of identical rational actors, the forces of supply and demand
worked their magic to determine prices and quantities of goods, capital,
and labor in a way that maximized welfare for society as a whole. The
distribution of wealth or income didn’t fit into the picture. It was simply
a by-product of market forces.

Then came the global financial crisis of 2008, and with it “the rise of the
realization that the top 1 percent or the top 5 percent have really vastly
outstripped, in income growth, the middle class,” he says.

Big data

The study of inequality also got a boost from the explosion of data that
can be mined with evermore powerful computers, making it easier to divide
the anonymous masses of consumers and workers into groups with common
characteristics. Big data, he says, “enables the study of heterogeneity,
and inequality is by definition heterogenous.”

Data has always been one of Milanovic’s passions, alongside his interest in
social classes, which flourished during his high school years in Brussels,
where his economist father was posted as Yugoslav envoy to the
then–European Economic Community.

“High school in Belgium—and I think it was the same in France—was very
Marxist,” he says.

His classmates were divided between leftist kids, influenced by the student
movements of the late 1960s and early 1970s, and “bourgeois” kids. As the
privileged son of a diplomat representing an ostensibly workers’
government, young Branko didn’t quite fit either category. “It was a very
peculiar situation,” he says.

At university in Belgrade, Milanovic initially leaned toward philosophy but
decided economics would be more practical. It also offered a way to combine
his interests in statistics and social classes.

American abundance

Graduate studies led to a fellowship at Florida State University in
Tallahassee, where he was impressed by American abundance—huge portions of
inexpensive food, free refills of coffee, big cars—alongside stark income
inequality and racial discrimination.

Two years later, he was back in Belgrade to work on his doctoral
dissertation on inequality in Yugoslavia, mining rare household survey data
supplied by a friend who worked in the federal statistical office.

While his dissertation raised eyebrows in Marxist Yugoslavia—along with his
decision to avoid joining the Communist Party—it launched a two-decade
career at the World Bank’s Research Department.

“Branko was really one of the leading experts, even at that time, on income
distribution,” says Alan Gelb, who hired Milanovic to join a small team
studying the transition to market economies in postcommunist eastern
Europe. Milanovic focused on issues of poverty and income distribution.

The wealth of data the World Bank collects was a priceless resource, and it
inspired Milanovic to carry out cross-country comparisons of inequality,
which were a novelty. One day in 1995, Milanovic was talking with Gelb’s
successor as the head of his unit.

“I suddenly had this idea: ‘Look, we have all this data from around the
world. We study individual countries, but we never put them together.’ ”
Four years later, he published the first study of global income
distribution based on household surveys.

In the years that followed, Milanovic published widely and profusely.
Alongside his work on postcommunist economies, he continued to explore
inequality and its link with globalization. His articles and books display
the broad range of his interests, which include history, literature, and
sports.

Globalized sport

In one article, he estimates the average income and inequality level in
Byzantium in the year 1000. Another looks at the links between labor
mobility and inequality in soccer, which he calls the most globalized
sport.

He found that club soccer has become very unequal because a dozen top
European teams can afford to recruit the world’s best players. On the other
hand, the free movement of soccer players has reduced inequality among
national teams. The reason: players from small countries can hone their
skills at top club teams, then return home to compete for their national
teams.

Literary conversations with his wife, Michele de Nevers, a specialist in
climate finance at the Center for Global Development, inspired him to write
an offbeat analysis of Jane Austen’s Pride and Prejudice. Arguing
that the book is as much about money as love, he estimates the incomes of
various characters and looks at how wealth influences the choice of mates
for Austen’s protagonist, Elizabeth Bennet.

He did the same for Leo Tolstoy’s Anna Karenina. Both essays were
published in Milanovic’s 2011 book,
The Haves and the Have-Nots: A Brief and Idiosyncratic History of
Global Inequality
.

Another book, Global Inequality: A New Approach for the Age of Globalization,
was a milestone that synthesized years of his scholarship on inequality
within and among countries since the Industrial Revolution.

War, inflation

In contrast to Piketty, who argues that inequality inexorably widens under
capitalism, Milanovic sees it moving in waves or cycles under the influence
of what he calls benign and malign forces. In advanced economies, income
disparity widened in the 19th and early 20th centuries until the malign
forces of war and hyperinflation reduced it by destroying wealth. After
World War II, benign forces such as progressive taxation, more powerful
labor unions, and more widely accessible education pushed inequality down.

The fall of the Berlin Wall was a watershed. It brought the former Soviet
bloc states into the global economy at a time when China also began opening
up. Rapid growth in the developing world narrowed inequality between
countries while widening it in the developed world, where middle-class
incomes stagnated as the wealthy prospered.

What does the future hold? It looks good for much of the developing world
and especially Asia, which will continue to catch up with the rich
countries. In advanced economies, on the other hand, the outlook seems
grimmer.

There, the twin forces of globalization and technological innovation will
continue to squeeze the middle class. Social mobility will decline as an
entrenched elite benefits from greater access to expensive higher education
and wields its political clout to enact “pro-rich” policies, such as
favorable tax regimes.

Social tensions

As income disparities grow, so will social tensions and political strife—a
prognosis confirmed by events such as Brexit and protests in France that
have occurred since the book’s publication in 2016. Milanovic worries that
this friction might lead to a “decoupling” of democracy and capitalism,
resulting in plutocracy in the United States and populism or nativism in
Europe.

While there has been considerable debate about inequality over the past
decade, “nothing has really moved” in policy terms, he says. “We are on
this automatic pilot which basically leads to higher inequality. But I am
not totally losing faith.”

The traditional answer—redistribution of income—won’t work as well as it
did in the past because of the mobility of capital, which allows the
wealthy to shelter their incomes in tax havens. Instead, policy should aim
for a redistribution of “endowments” such as wealth and education. Measures
would include higher inheritance taxes, policies that encourage companies
to distribute shares to workers, and increased state funding for education.

“We cannot achieve that tomorrow,” he says. “But I think we should have an
idea that we want to move to a capitalist world where endowments would be
much more equally distributed than today.”

Milanovic also takes on the nettlesome issue of inequality between
countries. He calculates that an American, simply by virtue of being born
in the United States, will earn 93 times more than a person born in the
world’s poorest country. This is what Milanovic calls the “citizenship
premium,” and it gives rise to pressure for migration as people born in
poor countries seek their fortunes in richer ones.

Milanovic argues that halting migration is no more feasible than halting
the movement of goods or capital. Yet it’s also unrealistic to expect
citizens of advanced economies to open their borders. His solution: allow
more immigrants but deny them the full rights of citizenship, and perhaps
tax them to compensate citizens displaced in the labor force.

His current work, in a way, brings him back to his roots in Yugoslavia. It
involves the study of class structure in the People’s Republic of China
and, in particular, a close look at the top 5 percent of the income
distribution. It forms a part of his next book, Capitalism, Alone,
which argues that China has developed a distinct form of capitalism that
will coexist with its liberal forebear.

Where is the study of inequality headed? Milanovic sees two frontiers, both
driven by the availability of new data. One is wealth inequality, à la
Piketty; the other is intergenerational inequality, a subject plumbed by
economists such as Harvard’s Raj Chetty.

The two areas “appeal to young people who are now very socially aware,’’ he
says. “On the other hand, they are very smart and want to work on tough
topics.” He adds, “I am very optimistic in that sense.”

CHRIS WELLISZ
is on the staff of Finance & Development.

PHOTO: IMF PHOTOOpinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.